Fixing International Corporate Taxation—Not Just a Problem for Advanced Economies

IMF Blog, June 25, 2014

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Author: Michael Keen
Date: June 25, 2014
Core issue: tax rules set by countries create cross-border spillovers that allow some multinationals to pay very little corporate tax; these spillovers have powerful implications for macroeconomic performance and economic development.

Several countries’ tax arrangements make them attractive conduits to route investments (referenced: Table 1).
Example observations:
- The Netherlands leads the world in its share of the world’s FDI.
- Mauritius is home to FDI “25 times the size of its economy.”
Tax arrangements that exploit gaps between national tax systems can yield very large associated tax revenue losses—especially for developing countries.

Developing countries raise a larger revenue share from corporate taxation than advanced economies (referenced: Chart 1).
In some country cases, revenue collected from a handful of foreign companies can be large not just relative to corporate tax but relative to all tax revenue:
- “10–15 percent” in some cases.
New evidence in the paper shows patterns are systematic: developing countries are much more affected by spillovers from other countries' tax systems than advanced economies, making them overly vulnerable to taxation changes elsewhere.

Over the past two decades, developing countries have signed a huge number of tax treaties (referenced: Chart 2).
Evidence on whether tax treaties deliver hoped-for benefits is mixed.
IMF country work finds sometimes significant leakage of revenue through treaty provisions.
The IMF has urged great care in ceding tax discretion by signing tax treaties; this view is now more widely accepted.

Spillovers occur when one country’s tax decisions affect others; common mechanisms include:
- Low or zero tax rates making a jurisdiction attractive to shift profits through paper transactions, eroding tax bases elsewhere.
Preliminary estimates in the paper suggest these spillover effects are both “strongly significant and large.”
Current international tax framework dates from the League of Nations “nearly a century ago” and is misaligned with modern realities:
- Growth of intra-firm trade
- Increased importance of services and intangibles (patents and the like)
- Increased digitalization

The G20-OECD Action Plan on Base Erosion and Profit Shifting (BEPS) is an ambitious effort to address many current problems.
Debate on more fundamental reform includes proposals such as:
- Taxing multinationals on a consolidated basis and using “formula apportionment” to allocate income across countries based on shares of assets, payroll, and/or sales.
The paper stresses that “formula apportionment” could create significant new problems and might not necessarily benefit developing countries.
Other fundamental reforms remain tentative; the IMF does not offer simple universal solutions.

These fundamental questions and the need for practical advice to countries taxing multinationals will persist.
The IMF’s experience, mandate, and global membership position it as an increasingly important participant in this technically challenging policy debate.

Source: Fixing International Corporate Taxation—Not Just a Problem for Advanced Economies, Michael Keen, June 25, 2014.

Spillovers in International Corporate Taxation; IMF Policy Paper; May 9, 2014
- Spillovers in International Corporate Taxation; IMF Policy Paper; May 9, 2014 (Markdown version)
- Spillovers in International Corporate Taxation; IMF Policy Paper; May 9, 2014 (PDF)